November 2007

"For years the software industry has largely competed on the basis of symmetry: Oracle versus IBM in databases; BEA versus IBM in application servers; etc. Feature wars, price wars, but not true competition wars. That is, competing by playing a different game, with different rules. Open source enables an alternative battleground upon which to compete, with community, code, and culture the new competitive tools."

Matt Asay, VP Business Development at Alfresco

Early in 2006, Microsoft CEO Steve Balmer made a public statement that Microsoft had no trouble competing with open source rivals on features. Balmer was downplaying the fact that Open Source Software (OSS) has changed the nature of competition in the software industry from one of feature-based competition to a much more complex model for competition.

Traditional firms like Microsoft are not simply competing against a loose group of programmers who produce OSS; they are competing against other firms who have chosen to use OSS as part of their product or service offering. This article is an examination of competition in this new environment where firm-to-firm competition includes those firms making use of OSS.

The evolution of the marketplace becomes evident when competition is viewed as a series of small, but discrete actions that are carried out by a firm. Each of these actions is intended to improve the firm's standing in the marketplace. Such actions can be classified as one of six different types of competitive action: (i) pricing, (ii) marketing, (iii) new products, (iv) capacity, (v) service, and (vi) signaling.

Through an examination of each of these types of actions, a clearer picture of competition emerges.

Freedom in Pricing

One of the common misconceptions about OSS is that it must be offered free of charge. This is not true as most open source licenses allow copyright owners to sell code, and the more permissive licenses allow anyone to charge for the code. This has given rise to the creation of commercial open source such as the commercial database provided by MySQL AB and the commercial content management package offered by Alfresco.

Traditional pricing models for software would fall into one of three categories: (i) licensed software, (ii) leased software, and (iii) Software as a Service (SaaS). Licensing models are the dominant form of software pricing, but all of these pricing models share common characteristics. Buyers and vendors are comfortable with these models as they are well understood and provide for predictable revenue and expense. Even SaaS models often include a component to cover software licensing costs.

By using the resources of OSS projects, firms are able to invest less in Research and Development (R&D) while closed source competitors are forced to expend ever increasing amounts on the resources required to develop a commercial software package. By charging less, or nothing, for the software and instead charging for value added services, OSS firms are better able to reach customers who could not have otherwise afforded the same level of service or customization. This allows OSS firms to shift focus to providing better customer service instead of investing in expensive R&D. As a class of software applications matures into a commodity, the large investment in code R&D eats at the profit margins of large firms. This maturation, combined with OSS pressure, may be spawning price wars that will force many firms to reevaluate their place in the market.

This is most evident in the database segment of the software market. The bottom-up pressure coming from OSS database players MySQL and PostgreSQL has resulted in aggressive pricing by Microsoft to lure high-end Oracle and IBM customers to the Microsoft camp. While Microsoft may have a temporary refuge by moving up the market, Oracle and IBM are already at the peak. The question remaining is how long any of the proprietary database competitors can hold off the OSS alternatives when what most customers require is now considered as basic database functionality.

Support as Marketing

When marketing an OSS product, many of the tried and true methods still apply. However, OSS does change the playing field in a number of important ways. Consider the way in which OSS products change the method to reach an audience of potential customers and how an OSS product is positioned relative to a commercial competitor.

In their 1981 book, Positioning: The Battle for your Mind, Ries and Trout counsel that any marketing action should attack a competitor's weaknesses. For a proprietary competitor, that weakness is the large investments in R&D, sales, marketing, and other fixed overhead. OSS based firms attack this weakness by positioning their solutions as open, accessible alternatives to the "big brother" approach. Closed source competitors respond in one of two ways: by attacking the feature set of the OSS product and by attacking the OSS product based on the lack of commercial support.

Unfortunately for the proprietary firms, the rapid evolution of software has resulted in a myriad of features while there is an increasing trend to start with a basic product and customize the rest to suit the unique needs of the purchasing firm. The attack on the support of OSS used to be valid, but we have since moved beyond that point. With large reputable firms backing OSS products, long-term, reliable support is available for costs similar to proprietary products. For the OSS firm, it is important that their messaging convey this changed reality, in cases where the OSS firm can provide a more customized solution than the proprietary competitor with the same level of support.

New Products

Market entry for OSS based firms may be easier when compared to proprietary firms. Entry into a new technology market requires reaching early adopters, those leaders who are willing to take a risk as they see the potential in the product. While marketing to these potential customers, the OSS firm is also reaping the benefits of attracting potential contributors to the project.

The two strongest motivations for OSS contribution are a need-driven desire to solve a current problem, and participation in the community in order to gain status and recognition. When the OSS firm can successfully convey the benefits of their product to the community, their marketing efforts reap the benefits of attracting both potential consumers and customers who will assist in the co-development of the solution.


For commodity-type businesses, decisions about capacity expansion typically involve the commitment of resources based on expectations of future conditions ranging from future demand to the competitive environment.

In the software industry, capacity actions are often taken to increase the speed of release for a software product or to undertake the R&D required to launch a new product. OSS communities tend to produce a wider variety of applications under a faster release cycle than their equivalent proprietary competitors.

Perhaps even more significant, a large portion of new OSS capacity is added outside the project's boundaries. For the OSS firm, much of the effort required to add capacity, either in the form of faster release cycles or new products, is in influencing the governance structure of the OSS projects they are utilizing as part of their offerings. This effort may include paying contributors, but it is more often about leadership actions taken within the community to set direction, address outstanding quality issues, and attract new contributors to the project. The attraction of new committers to the project adds both development capacity and the opportunity to reinvigorate innovation within a community.

Specific actions that can be taken by the OSS firm to assist and provide leadership to the OSS community include:

  • Contributing missing components and documentation
  • Providing development infrastructure for the OSS project
  • Acting as an external quality assurance team
  • Providing organizational staff to coordinate complex cross-community efforts such as standards development
  • Providing direct monetary support through sponsorship of events, or funding for purchase of other software and equipment
  • Releasing existing propriety code to the OSS community


A recent IDC software industry forecast projects that over the next five years, open source services will grow at a rate three times that of the overall IT services industry. IDC attributes this rapid growth to an increased awareness among customers and solution providers of the possible economic benefits of OSS alternatives. While this may be true, there are some telling differences in how an OSS firm provides services compared to proprietary competitors.

Open source service takes a number of forms. The most common forms are the: i) stack integrator, ii) support provider, iii) systems integrator, and iv) consultant. The latter three are commonly provided through a professional services division or a network of partners.

Where the major difference arises is in the area of stack integrator. Stack integrators take many disparate OSS applications and combine them to form a single cohesive solution. These stacks can be assembled on a client-by-client basis or productized and packaged.

OSS firms develop expertise to evaluate and incorporate OSS as part of a larger solution, allowing the best combination of products for a particular client. The proprietary competitor is often limited to a selection of in-house developed applications, largely as a result of a business model driven by sales of software licenses. If a services firm is making use of proprietary applications, they are further limited as they can only perform integration to the level that is exposed by the commercial product's Application Programming Interface (API). The OSS firm has no such restrictions and can offer seamless integration.


Marketing signals are an action by a competitor to provide direct or indirect indication of its intentions, motives, goals, or internal situations. The signaling action will often precede the actual action or, in the case of signaling being used for misdirection, the inaction. Traditional views hold that marketing signals can result in a preemptive advantage and may be expected as part of an industry norm. The most commonly discussed risks of signaling are the revelation of too much information to a competitor, product line cannibalization, reduced reputation, and a perception of anti-trust behaviour.

OSS firms reap the same positive advantages of signaling as their proprietary competitors. However, they are as not as susceptible to the negative aspects of signaling. Consider that an OSS product's code base is maintained in a publicly accessible repository; that repository and code serves as the basis for OSS product path signaling. This complete revelation of the software product diminishes the discussed risks. Similarly, as the OSS firm reveals everything about the product as part of their business model, there is no worry of over-revelation to a competitor. Instead, the firm gains the trust of users and consumers by openly sharing its intentions and plans for the product. Conclusion

OSS firms have access to a wide variety of competitive avenues. They can opt to compete in the same manner as the traditional software firms; however, the use of OSS allows these firms to more safely engage in price wars, reach an unserved customer base, turn customers into employees, provide a superior level of service and support, and remove from customers' minds any fear of vendor lock-in.

The challenge facing an OSS firm is how to best utilize the external resource that is the OSS community. Treading a careful line between consumption and contribution to maintain a productive community is an activity that requires finesse and a form of management that is still evolving.

Share this article:

Cite this article:

Rate This Content: 
No votes have been cast yet. Have your say!